Remember that $250 billion that the government is injecting into wobbly banks so they can start lending to American companies and consumers again? Yes? Well, of course the banks have no intention of lending out a dime of it.
Merrill’s John Thain admitted as much two days after the bailout. Then JP Morgan’s Jamie Dimon dropped hints to that effect by saying he “hoped” the bailout would work–implying that he didn’t think it would. And now another JP Morgan executive has been kind enough to tell Joe Nocera of the New York Times (via a recorded internal conference call) that JP Morgan has no intention of lending the $25 billion of taxpayer money the government just gave it to help restore the US economy:
“20-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began.
[What’s it going to help those struggling folks do? Plug the gaping holes in their balance sheets. But given that the value of their assets is still plunging, they’d be nuts to lend any of it out. Instead, they’ll hoard it like starving people given boxes full of food. Meanwhile, what will JP Morgan do?…]
“What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.“
As Joe observes, not a word about lending money. To reiterate, what will banks do with the $250 billion we just gave them?
- hoard it
- buy other banks with it.
And, of course, the insurance companies and car companies that now want some of that money also aren’t going to lend it, either (or use it to write new policies or make cars). It’s just a sop to their shareholders and debtholders.
What SHOULD the government do? Send its bank regulators into JP Morgan and every other bank it wants to save, audit the asset values, and force the bank to write down the asset values to nuclear winter levels. THEN inject the taxpayer money (getting a far bigger piece of the equity in return). This is what has worked historically, and it would eventually work here.
And don’t allow the banks to acquire other banks with cash. Make them do it with stock, instead. Then, only then, will the banks begin to lend that cash. Because they’ll have no other choice but to put it to work.